BF-2023TaxGuide

2023

TAX GUIDE

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Contents The Greatest Trick Ever Played: A Story of Tax Planning...................................................................... 1 2023 Tax Changes: Understanding Tax Changes for 2023.................................................................... 1 Tax Planning Strategies for Individuals...................................................................................................... 1 Tax Planning Strategies for Businesses..................................................................................................... 5 2023 Tax Planning Strategies.............................................................................................................. 7 Tax Diversification....................................................................................................................................... 7 Timing of Income and Deductions............................................................................................................. 8 Roth Conversions......................................................................................................................................... 10 Required Minimum Distributions (RMDs)............................................................................................. 11 Additional Tax Planning Strategies...................................................................................................... 12 Tax Deductions and Credits................................................................................................................. 14 The Role of Financial Advisors in Tax Planning.................................................................................... 16 Conclusion ......................................................................................................................................... 18

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The Greatest Trick Ever Played: A Story of Tax Planning In our opinion, it all started with the Revenue Act of 1978. It was supposed to be a way for employees to save for their retirement while getting a tax break.

And it worked. The 401(k) was born and it quickly became the go-to retirement plan for companies across America. But what people didn’t realize was that the greatest trick ever played was being pulled on them. See, back in our grandparents’ day, company pensions handled retirement. The responsibility wasn’t on the individual. But now, it was. And they were often left to do it alone. With so many different and confusing options, it’s no wonder that so many people struggle with retirement planning. And to make matters worse, individuals are playing a dangerous game. They’re deferring taxes to an unknown tax rate that most experts believe is bound to increase. With the federal debt at an all-time high, it seems to us it’s only a matter of time before taxes could potentially increase.

But we believe there’s hope. By working with a financial advisor who understands the complexities of tax planning, individuals can take control of their retirement planning and minimize their tax liability.

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Don’t fall victim to the greatest trick ever played.

Take control of your retirement planning and minimize your tax liability with the help of a financial advisor and the resources in this tax guide.

Introduction Tax planning is an essential part of managing your finances. As the tax laws continue to evolve, it is important to stay informed and up-to-date on the latest changes that may affect your income and wealth. In this guide, we will explore the different tax rules, regulations, and changes for 2023 and provide you with practical tips for planning your taxes.

2023 Tax Changes: Understanding Tax Changes for 2023 Tax Planning Strategies for Individuals For the 2023 tax year, there are a few key changes that will affect individual taxpayers. One major change is the adjustment for inflation, which impacts a range of tax-related items, such as the standard deduction, tax brackets, and contribution limits for retirement accounts.

The standard deduction for 2023 has increased slightly for all filing statuses. For single filers, the standard deduction is $13,850, an increase of $900 from 2022. For married couples filing jointly, the standard deduction is $27,700, an increase of $1,800 from 2022. For those filing as head of household, the standard deduction is $20,800, an increase of $1,400 from 2022.

Standard Deductions Filing Status

2022

2023

Single

$12,950

$13,850

Married, Filing Jointly

$25,900

$27,700

Head of Household

$19,400

$20,800

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The tax brackets for 2023 have also been adjusted for inflation, resulting in slight increases in the income thresholds for each bracket. The top tax rate of 37% will apply to individuals with taxable income above $578,125 for single filers and $693,750 for married couples filing jointly.

2023. For example, the contribution limit for 401(k) and 403(b) plans has increased to $22,500, with an additional catch-up contribution of $6,500 allowed for those age 50 and older. The contribution limit for traditional and Roth IRAs has increased to $6,500, with a catch-up contribution of $1,000 allowed for those age 50 and older.

In addition, the contribution limits for various retirement accounts have increased slightly for

2023 Tax Brackets

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Tax Rate

Single

Married, Filing Jointly

Married, Filing Separately

10%

Up to $11,000

Up to $22,000

Up to $11,000

Up to $15,700

12%

$11,001 - $44,725

$22,001 - $89,450

$11,001 - $44,725

$15,701 - $59,850

22%

$44,726 - $95,375

$89,451 - $190,750

$44,726 - $95,375

$59,851 - $95,350

24%

$95,376 - $182,100

$190,751 - $364,200

$95,376 - $182,100

$95,351 - $182,100

32%

$182,101 - $231,250

$364,201 - $462,500

$182,101 - $231,250

$182,101 - $231,250

35%

$231,251 - $578,125

$462,501 - $693,750

$231,251 - 364,875

$231,251 - $578,100

37%

$578,126 or more

$693,751 or more

$346,876 or more

$578,101 or more

Head of Household

It’s important to keep these changes in mind when planning for taxes in 2023, as they can impact your overall tax liability and retirement savings strategy.

Consulting with a financial advisor can help you navigate these changes and ensure that you’re taking advantage of all available tax planning strategies.

How these changes may impact your tax liability and planning strategies The 2023 tax changes for individual taxpayers may have a significant impact on your tax liability and planning strategies. For instance, if you are subject to a higher tax bracket, you may need to consider adjusting your income or deductions to minimize your taxes. Additionally, changes in the standard deduction may affect whether you should itemize your deductions. It is essential to review the changes and evaluate how they may impact your tax situation.

Another important aspect to consider is the inflation adjustments. For example, the IRS adjusts tax brackets, exemptions, and other deductions for inflation each year. This means that certain tax breaks and deductions may be worth more or less than they were in previous years. Understanding

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these adjustments can help you make informed decisions about your finances.

It is crucial to have a sound tax planning strategy in place to take advantage of these changes and maximize your savings. A financial advisor can help you navigate these complex tax rules and regulations and develop a personalized tax plan that suits your unique financial goals and objectives.

Tax Planning Strategies for Businesses Tax changes affecting business owners, including changes in depreciation rules, qualified business income deduction, and other business credits The 2023 tax changes also affect business owners, with several changes in depreciation rules, qualified business income deduction, and other business credits. One of the significant changes is the increased Section 179 deduction limit for businesses that purchase qualifying equipment or software. The deduction limit has been raised to $1.16 million, up from $1.08 million in 2022.

The qualified business income deduction, also known as the “pass-through deduction,” has also

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undergone changes. The deduction allows business owners to deduct up to 20% of their qualified business income from their taxable income. In 2023, the deduction will be phased out for taxpayers with taxable income above $182,100 for single filers and $364,200 for married couples filing jointly.

There are also changes to the business tax credit landscape. One notable change is the expansion of the Work Opportunity Tax Credit, which provides employers with a credit for hiring individuals from certain targeted groups, such as veterans, exfelons, and those receiving Supplemental Nutrition Assistance Program (SNAP) benefits.

It’s important for business owners to understand these changes and how they may affect their tax liability and planning strategies. Business owners should work closely with their financial advisors to take advantage of available deductions and credits and develop tax-efficient strategies for their businesses.

How these changes may impact business taxes and planning strategies The changes in depreciation rules, qualified business income deduction, and other business credits may

significantly impact business taxes and planning strategies. For instance, the 2023 tax changes increase the maximum deduction for Section 179, which allows businesses to expense the cost of qualifying property rather than depreciating it over time. The deduction limit has increased to $1.16 million for the tax year 2023, up from $1.08 million in 2022.

Additionally, the qualified business income (QBI) deduction remains in effect for 2023, allowing eligible business owners to deduct up to 20% of their qualified business income from their taxable income. However, the rules for calculating QBI deductions are complex, and business owners may need to seek the advice of a tax professional to maximize their deductions.

The changes to other business credits, such as the research and development credit, can also impact tax planning strategies for businesses. It is important for business owners to stay up-to-date on these changes and work with their financial advisor or tax professional to develop a comprehensive tax strategy that takes advantage of all available credits and deductions while minimizing tax liability.

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2023 Tax Planning Strategies

expected to increase in the future, it may be beneficial to withdraw from tax-free accounts like a Roth IRA to avoid paying higher taxes on traditional IRA or 401(k) withdrawals.

Tax Diversification How having a mix of taxable, tax-deferred, and tax-free income sources can help minimize your taxes Having a mix of taxable, tax-deferred, and taxfree income sources can help minimize taxes in a number of ways: •

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First, it allows for flexibility in choosing which accounts to draw income from in any given year, depending on tax rates and personal circumstances. For example, if tax rates are low in a particular year, it may be advantageous to withdraw from a tax-deferred account like a traditional IRA or 401(k) to take advantage of the low rate, while in a higher tax year, it may be more beneficial to withdraw from a tax-free account like a Roth IRA or HSA. Second, it can provide a hedge against future tax rate increases. With a mix of taxable, taxdeferred, and tax-free accounts, an individual can adjust their withdrawals based on future tax rates. For example, if tax rates are

•

Finally, having a mix of income sources can help minimize taxes in retirement by allowing individuals to stay below certain income thresholds that trigger higher tax rates or the phaseout of certain deductions or credits.

It’s important to work with a financial advisor to determine the appropriate mix of income sources based on individual circumstances and tax planning goals.

Discussion of different tax diversification strategies, such as Roth IRA conversions and using a Health Savings Account (HSA) Tax diversification is an important part of managing your finances and minimizing your taxes. One effective strategy is to have a mix of taxable, taxdeferred, and tax-free income sources. This can help you minimize taxes in retirement by allowing you to choose which accounts to withdraw money from based on your tax situation each year.

One tax diversification strategy is to convert traditional IRA or 401(k) funds to a Roth IRA. A Roth IRA allows you to withdraw money tax-free in retirement, which can be a valuable source of taxfree income. By converting some of your traditional IRA or 401(k) funds to a Roth IRA, you can reduce the amount of taxable income you will have in retirement.

Another tax diversification strategy is to use a Health Savings Account (HSA) to save for medical expenses. HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow taxfree, and withdrawals for qualified medical expenses are tax-free. By contributing to an HSA, you can reduce your taxable income in the year of the contribution and have a tax-free source of income in retirement for medical expenses.

It’s important to note that Roth conversions and HSA contributions may not be appropriate for everyone, and there are certain limitations and rules to follow.

It’s recommended to speak with a financial advisor to determine if these strategies are right for you and to ensure that they are implemented correctly.

Timing of Income and Deductions How timing of income and deductions can impact tax liability Timing of income and deductions can have a significant impact on your tax liability. If you expect your income to be higher in the current year compared to the next year, it may be beneficial to accelerate income into the current year and defer deductions to the following year. This can help reduce your taxable income in the current year and potentially lower your tax liability.

On the other hand, if you expect your income to be lower in the current year compared to the next year, it may be beneficial to defer income to the following year and accelerate deductions into the current year.

This can help reduce your taxable income in the following year and potentially lower your tax liability.

There are several timing strategies that can be used to optimize your tax liability, including prepaying expenses, delaying billing, and deferring bonuses.

However, it’s important to note that these strategies may not be appropriate for everyone and should be evaluated on a case-by-case basis.

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Working with a financial advisor or tax professional can help you determine the best timing strategies for your specific situation and help you make informed decisions about your tax planning.

Explanation of strategies such as bunching deductions and delaying income to minimize taxes Bunching deductions and delaying income are two strategies that can help reduce your tax liability by shifting the timing of when you receive income and when you make deductible payments.

Bunching deductions involves grouping together expenses that you can itemize, such as charitable contributions or medical expenses, into a single year in order to exceed the standard deduction. By doing so, you may be able to itemize your deductions and reduce

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your taxable income for that year. In the following year, you can take the standard deduction and delay your itemized deductions until the next year.

Delaying income involves postponing receipt of income until a later year, which can help you stay in a lower tax bracket. For example, if you are due a bonus at the end of the year, you could negotiate to have it paid out in the following year. Similarly, if you are a freelancer or self-employed, you may be able to delay billing clients until the following year to reduce your taxable income for the current year.

It’s important to note that timing of income and deductions can be complex, and you should consult with a financial advisor or tax professional to determine the best strategy for your individual situation.

Roth Conversions

free income sources can help minimize taxes in retirement. Roth conversions can provide a source of tax-free income in retirement, which can be particularly valuable if tax rates increase in the future.

How Roth conversions work, potential tax benefits, and factors to consider when deciding whether to convert Roth conversions can be a powerful tool for tax planning. In a Roth conversion, you move money from a traditional IRA or 401(k) account into a Roth account, paying taxes on the converted amount at the time of the conversion. The funds in the Roth account can then grow tax-free and be withdrawn tax-free in retirement.

There are several potential benefits of Roth conversions, including: •

Tax diversification: As mentioned earlier, having a mix of taxable, tax-deferred, and tax-

•

Lower future taxes: By paying taxes on the converted amount now, you may be able to avoid paying higher taxes on the same amount later. This can be especially valuable if you expect to be in a higher tax bracket in the future.

•

More flexibility in retirement: Because Roth accounts do not have required minimum distributions (RMDs) during the owner’s lifetime, you have more flexibility in when and how much you withdraw from your retirement accounts.

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Factors to consider when deciding whether to do a Roth conversion include your current and future tax brackets, your age, your financial goals, and your overall financial situation. A financial advisor can help you determine whether a Roth conversion makes sense for you and can help you navigate the tax implications of the conversion.

Discussion of how Roth conversions can be used to minimize future taxes and create tax-free income in retirement Roth conversions can be a powerful tool to minimize future taxes and create tax-free income in retirement. By converting traditional IRA or 401(k) assets into a Roth account, you can pay taxes now at your current tax rate, which may be lower than your future tax rate. This can be especially beneficial if you expect your income to increase in the future.

Once the assets are in the Roth account, they grow tax-free and can be withdrawn tax-free in retirement.

This can be a valuable source of tax-free income that can be used to supplement other sources of taxable income, such as Social Security or pensions.

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It’s important to carefully consider the tax implications of a Roth conversion, as it will trigger a tax bill in the year of the conversion. Factors to consider include your current tax bracket, your expected future tax bracket, and your financial goals.

Working with a financial advisor can help you determine whether a Roth conversion makes sense for your unique situation, and develop a comprehensive tax strategy that aligns with your financial goals.

Required Minimum Distributions (RMDs) As you reach retirement age, it’s important to understand the rules surrounding Required Minimum Distributions (RMDs). RMDs are minimum amounts that must be withdrawn from certain types of retirement accounts starting at age 72 or age 73 if you reach age 72 after Dec. 31, 2022, with some exceptions for certain types of accounts. The purpose of RMDs is to ensure that individuals with tax-deferred retirement accounts withdraw a certain amount each year and pay taxes on that income. If you fail to take your RMD, you may be subject to a steep penalty of up to 50% of the amount you were

supposed to withdraw. Therefore, it’s essential to understand the rules and take your RMD on time.

The amount of your RMD is based on your age, life expectancy, and account balance. You can calculate your RMD using the IRS Uniform Lifetime Table, which is based on life expectancy and determines the distribution period for your account. Alternatively, you can use the Joint and Last Survivor Table if your spouse is more than 10 years younger than you and is the sole beneficiary of the account. It’s important to note that RMDs are subject to ordinary income taxes, so you should plan accordingly for the additional taxable income. You may also want to consider tax-efficient withdrawal strategies to minimize your tax liability. In some cases, you may be able to avoid taking an RMD by rolling over the funds to a Roth IRA, which does not require RMDs during the account owner’s lifetime. However, this strategy involves paying taxes on the converted amount, so you should speak with a financial advisor to determine if it makes sense for your situation.

Overall, understanding the rules surrounding RMDs is crucial for minimizing tax liability and avoiding costly penalties. Be sure to consult with a financial advisor to develop a plan that addresses your unique needs and goals.

Additional Tax Planning Strategies Section 7702 of the Internal Revenue Code is a tax provision that governs the taxation of life insurance contracts. The section defines the criteria for a life insurance policy to qualify for tax-free treatment of death benefits and taxdeferred accumulation of cash value. One of the main benefits of utilizing Section 7702 is the potential for tax-free distributions in retirement.

Unlike traditional retirement accounts such as 401(k)s and IRAs, where distributions are generally taxable, distributions from a properly structured life insurance policy can be tax-free. To qualify for tax-free treatment under Section 7702, a life insurance policy must meet certain criteria, such as the amount of premiums paid and the death benefit amount. The policy must also pass certain tests, such as the Cash Value Accumulation Test (CVAT) and the Guideline Premium and Corridor Test (GPT).

The CVAT ensures that the policy’s cash value does not exceed certain limits based on the amount of premiums paid, while the GPT ensures that the premiums paid do not exceed the maximum amount allowed to maintain tax-advantaged status. When structured properly, a life insurance policy can be a powerful tool for tax planning, especially for highincome individuals who may be subject to higher tax

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rates in retirement. However, it’s important to note that life insurance policies also come with fees and expenses, and it’s important to work with a financial advisor who understands the complexities of these policies before making any decisions. Overall, Section 7702 can be an advanced tax planning strategy for individuals looking to maximize tax-free distributions in retirement while also providing a death benefit for their beneficiaries.

Tax Deductions and Credits Overview of different tax deductions and credits that can help lower tax liability, including charitable contributions, mortgage interest, and education expenses.

Tax deductions and credits can help lower your tax liability by reducing your taxable income or providing a credit against taxes owed. Some common deductions and credits include: •

Charitable contributions: Donations to qualified charitable organizations can be deducted from your taxable income, reducing your tax liability. The 2023 tax law allows a deduction of up to 60% of your adjusted gross

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income for charitable contributions. In some cases, other rules and limits may apply.

•

•

Education expenses: If you or your dependents are pursuing higher education, you may be able to claim tax credits or deductions for tuition, fees, and other related expenses.

•

Retirement contributions: Contributions to retirement accounts such as 401(k)s, IRAs, and HSAs can reduce your taxable income and lower your tax liability. In 2023, individuals can contribute up to $22,500 to their 401(k) plans, and individuals over 50 can make catch-up contributions of up to $7,500.

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Mortgage interest: If you have a mortgage on your primary residence, you can deduct the interest paid on the loan from your taxable income. This can be a significant deduction, especially in the early years of your mortgage when interest payments are high.

Child tax credit: The child tax credit provides a credit of up to $2,000 per qualifying child under the age of 17. In same cases, in 2023, up to $1,600 of this credit is refundable. The credit is refundable, meaning it can reduce your tax liability even if you do not owe taxes.

It’s important to note that some deductions and credits have income limitations, phaseouts, or other restrictions, so it’s essential to consult with a tax professional to determine which deductions and credits apply to your specific situation.

How tax deductions and credits can be used in combination to maximize tax savings Tax deductions and credits can be used in combination to help lower your tax liability. For example, if you make charitable contributions to a qualified organization, you may be able to deduct the amount on your tax return. In addition, if you have educational expenses, you may be able to claim the American Opportunity Tax Credit, which provides a credit of up to $2,500 per eligible student.

By strategically using these deductions and credits, you may be able to maximize your tax savings. For example, you may choose to bunch your charitable contributions every other year to maximize your itemized deductions in that year, while taking the standard deduction in the other years. Additionally, if you have educational expenses in a particular year, you may want to take advantage of the tax credit

that year rather than spreading out the expenses over multiple years.

It’s important to note that tax laws and regulations are complex, and it can be challenging to navigate all of the options available. That’s why it’s a good idea to work with a financial advisor or tax professional to help you develop a comprehensive tax strategy that addresses your unique needs and goals. They can help you identify the deductions and credits that are most relevant to your situation and develop a plan to maximize your tax savings.

The Role of Financial Advisors in Tax Planning How financial advisors can help you develop a comprehensive tax strategy that addresses your unique needs and goals Working with a financial advisor can be beneficial in developing a comprehensive tax strategy that can address your specific needs and goals. A financial advisor can help you navigate the complex tax landscape and identify opportunities to minimize your tax liability while optimizing your financial goals.

One of the main benefits of working with a financial advisor is their ability to provide personalized advice that takes into account your individual financial situation. They can help you determine which tax diversification strategies are best suited for you, given your income level, tax bracket, and long-term financial goals.

Additionally, financial advisors can help you stay up to date on changes to the tax code and adjust your strategy accordingly. They can also help you with tax planning throughout the year, instead of just during tax season.

Overall, having a financial advisor can help you make informed decisions and take advantage of tax-saving opportunities to minimize your tax liability and optimize your financial well-being.

How financial advisors can help you navigate complex tax laws and regulations to minimize taxes and avoid costly mistakes Financial advisors can help you navigate the complex and ever-changing tax laws and regulations to minimize your taxes and avoid costly mistakes.

They have a deep understanding of the tax code and can help you identify tax planning opportunities

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that you may not be aware of on your own. For example, a financial advisor can help you identify tax deductions and credits that you may be eligible for, and help you strategize ways to maximize those benefits. They can also help you develop a tax diversification strategy that balances your taxable, tax-deferred, and tax-free income sources, taking into account your current and future tax rates.

Moreover, financial advisors can help you make informed decisions about whether to convert to a Roth IRA, and when to time income and deductions.

They can help you understand the tax implications of various financial decisions, and develop a comprehensive tax strategy that addresses your unique needs and goals.

with a qualified financial advisor. They can help you navigate the complex tax laws and regulations, identify potential tax savings opportunities, and develop a personalized plan that addresses your unique needs and goals.

Don’t let taxes eat into your hard-earned money.

Contact a financial advisor today to start developing your tax strategy and set yourself up for long-term financial success.

Working with a financial advisor can help you save money on taxes, maximize your wealth, and ensure that you are making informed financial decisions that align with your long-term goals.

In Conclusion Tax planning is an ongoing process that requires careful consideration of tax laws and regulations. If you’re looking to minimize your taxes and develop a comprehensive tax strategy, it’s essential to work

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Investment advisory services are offered through Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser. The content provided is intended for informational and educational purposes only. Views reflected in this commentary are subject to change at any time without notice. The information contained herein does not constitute an offer to sell any securities or represent an express or implied opinion or endorsement of any specific investment opportunity, offering or issuer. Any discussion of performance or returns is not indicative of future results. Any discussions of specific strategies are for informational purposes only and have been provided to help determine whether they may be appropriate for your specific situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. Each individual investor’s situation is different, and any ideas provided may not be appropriate for your particular circumstances. Foundations only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Nothing herein constitutes a recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person. No legal or tax advice is provided. Please review your retirement, tax, and legacy planning strategies with a legal/tax professional before transacting or implementing any strategy discussed herein.